The News Behind The News
January 3, 2001
The Results of Shortsightedness
by IASPS StaffNehemia Strasler is considered to be among Israel’s leading economic journalists, and to be free-market in orientation (although to be free-market in Israel typically means to favor increasing the efficiency of the state sector, not to reduce it). Strasler bemoans the poor performance of Israel’s economy in the last quarter of 2000, stemming from the new Al Aqsa Intifada that savaged tourism, construction, and investment. Growth estimates for 2001 have been lowered.
Here are the highlights of Strasler’s piece.
(1) No reduction in unemployment, despite high growth during the first nine months of 2000.
(2) The death of inflation due to the Bank of Israel’s high interest rate policy.
(3) A strong shekel, due to an influx of $8 billion, invested mainly in high-tech.
(4) The failure of the Knesset to approve tax reform, the continued strength of workers’ committees to blackmail the country with strikes, the persistence of monopolies (e.g., Israel Electric Corporation, oil refineries), and failure to privatize El Al and two banks that were nationalized in 1983.
(5) Anarchy in the Knesset, with each member and faction demanding cash in exchange for participation in any coalition. For the first time in Israel’s history, there is no authorized budget for the new year.
It’s something of a mystery why imposing new taxes on capital would raise growth, when almost every academic study concludes the opposite. Let’s put that issue aside.
There is something much more important missing in Strasler’s analysis. It is the same thing that is missing in almost every analysis of the Israeli economy. It is what no Israeli or American wants to talk about. It is, as you know from reading IASPS studies and articles, foreign aid and other unilateral transfers. During each of the past five years, foreign aid shipped $4 billion to the government of Israel. Adding in reparations, institutional transfers, and other remittances brings the total to $7-8 billion a year. Since aid began in earnest in 1974, the total amount received by the government of Israel, expressed in year 2000 purchasing power dollars, comes to $104 billion. Other unilateral transfers greatly increase this number.
If we incorporate unilateral grants and transfers into Strasler’s analysis, the shadows of his concerns come into sharp focus. The strong shekel is due less to high-tech investment flowing into Israel than to aid and other transfers. Israeli outbound investment is roughly equal to inward investment in real assets. Foreign investment in Israeli financial assets really represents the sale of Israeli high-tech enterprises to U.S. firms, only some of which finds it way back into shekels. These proceeds and billions of unearned dollars received by the government of Israel in unilateral grants and transfers are converted into shekels for spending, . The strong demand for shekels, with the supply limited by the Bank of Israel’s tight monetary policy, has resulted in modest shekel appreciation. Take away more than $7 billion in unilateral grants and transfers and the shekel would fall. Or the Bank of Israel would have to raise interest rates to support the shekel, thereby depressing economic activity.
Why can’t Strasler explain how workers’ committees are stronger than the government, that privatization has stalled, and that the Knesset is in anarchy? The answer is staring Strasler in the face. All he has to do is peek inside the pages of the Central Bureau of Statistics monthly or annual reports at the balance of payments figures. Israeli unions can extort the country through strikes and other sanctions because they know the government will use aid to pay them off. The government, for its part, does not need to privatize state-owned enterprises for cash because it can use aid to help finance its spending. The Knesset is in anarchy because members, factions, and parties fight for their share of unilateral transfers.
This is what we mean when we say that Nehemia Strasler is an Israeli-style proponent of free markets. He is in favor of privatization, low inflation, a strong shekel, and an orderly Knesset. But he cannot bring himself to examine the role of free money, which, evidently, remains heresy.
Mr. Strasler, if you think Israel cannot survive without aid, please tell us why. Or, if you believe that aid is irrelevant to Israel’s “shortsightedness,” please tell us why, and if Israel should give it up. In any case, surely billions of free dollars have some impact, peace or no peace.
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